CHARLOTTE AMALIE, U.S. Virgin Islands — The hotel business in the Caribbean is typically characterized as high-risk, high-reward as hoteliers balance resilient tourism demand against devastating hurricanes, increasing costs and investment difficulty.
In most of the high-profile Caribbean locations, hotel performance metrics are at record levels, but there is little to no transaction activity. That supply deficit helps hoteliers keep rates and occupancy high, but those taking a longer-term view say investment dollars for new hotels are definitely needed across the region.
Private Equity Picture
“It’s such an interesting time in the Caribbean,” said Rebecca Cocchiola, senior vice president of Chicago-based private equity firm Singerman Real Estate, on a panel at the Caribbean Hotel Investment Conference & Operating Summit. “We see bullish data about operating performance here. There’s a lot of positive momentum, but sellers also are seeing that and not moderating expectations to settle an asset based on financing. So there’s a big spread.”
Add in the regional challenges in the Caribbean around government and regulatory issues, and building a new resort in this area can be tough, even with many governments offering tax and other incentives.
“These are small economies and it’s very difficult to build a hotel in the islands,” said Ali Elam, managing director of Fortress Investment Group. “Sometimes it doesn’t pencil, but there has to be a way to make it work. Some make it work by adding residential units, but that can be speculative.”
Fortress owns The Westin Beach Resort & Spa at Frenchman's Reef and Morningstar Buoy Haus Resort hotels that opened in St. Thomas, U.S. Virgin Islands, this year following a complete rebuilding and rebranding of St. Thomas’ Frenchman’s Reef, which was devastated by Hurricanes Maria and Irma in 2017. The $425 million project was offset in part by insurance payouts and government incentives, and now St. Thomas has nearly 500 more guestrooms that had been completely out of inventory since 2017.
Opportunities are out there, but speakers said the challenges around new construction are tough to work through.
“The numbers are way too high,” said Andrew Farkas, founder and CEO of private equity firm Island Capital Partners. “There’s a true dearth of supply in this part of the world. Some is created by labor and supply-chain issues. Some is created by cost of debt and cost of materials.”
Still, panelists said the Caribbean has always been a high-risk, high-reward region, and those willing to invest there now are meeting with governments that often are more receptive to incentives and smoothing the road to development.
Institutional-level investment across the Caribbean is slowly growing, and the region will benefit from that in the future when economic tides turn. Still, projects in the Caribbean are more often than not built by family offices or other equity sources, not financed through traditional debt markets.
“There is a lot of capital here; it’s hotels owned by families, with very low-levered debt from regional banks, so there’s less pressure to sell and I don’t see that changing,” Cocchiola said.
Nicholas Hecker, executive managing director and chief investment officer for private equity firm Sculptor Real Estate, said the best way to minimize the risk factor of investing in the Caribbean is to lean in to what works.
“For U.S. institutional funds that have to have a certain exit, it’s difficult to invest here,” he said. “Family offices and different long-term owners in the region are probably better equity sources for these assets, while money like ours is probably better for a different part of the capital stack.”
Debt is Difficult
While debt is available, lenders said they're being more conservative.
Still, the strong performance and demand metrics in the Caribbean show there's room for more hotel projects; stakeholders just need to be patient, speakers said.
"Demand is up post-COVID, so we're seeing a lot of projects that were on hold coming back but we're seeing relatively conservative structures," said IDB Invest Lead Investment Officer Stefan Wright. "We're typically conservative, lending at 50/50 debt to equity, and we're seeing other lenders now taking a similar approach."
Michael McQuilkin, head of the investment banking division for Trinidad-based Republic Bank Limited, agreed that bankers' risk appetite has changed and leverage is decreasing.
Bank lenders are spending time on feasibility studies to dig into the nuances of each project and demand generators in the location. McQuilkin cited Guyana as one example of a country — still typically considered part of the Caribbean even though it is on the South American continent — with many hotels on the way to cater to business-travel demand. Meanwhile, Turks & Caicos has fewer hotels in the pipeline because it's considered an ultra-luxury destination.
High interest rates aren't precluding hardy investors from pursuing debt, but they aren't helping, speakers said.
"It's been an adjustment for banks and our clients to try to find ways to cover costs that are outside the typical scope," said Isabel de Caires, director of investment banking at CIBC FirstCaribbean International Bank. "But strong KPIs are making up for it. It's been a challenge but it hasn't stopped development or deals."